Building Momentum


Economic News

22 Jul 2010
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Malaysia's construction industry is set to rebound from the slowdown of the local economy, with both private and state funds flowing to new projects that are helping to boost confidence as the country works to increase future supply of infrastructure and property.

On the back of increased funding for construction projects being distributed by the state, part of the government's $19bn economic stimulus programme, along with other scheduled capital works investments, analysts are predicting solid growth for the industry and are recommending investors to buy into local construction stocks.

According to Terence Wong, an analyst at CIMB Investment Bank, stocks in the building sector will outperform the rest of the Malaysian market, with enough projects being launched to benefit all companies in the sector.

"Construction is the must-own sector in Malaysia because pump-priming will come through and it will come through aggressively over the next few years," Wong told the Bloomberg news agency on July 20.

Shares in some of Malaysia's largest building companies, such as Gamuda, IJM Corporation and WCT have performed strongly, and the construction index of the Kuala Lumpur stock exchange has gained 27% so far this year. Shares in all three companies have risen by some 50% this year.

CIMB is not the only one advising investors to plough into construction stocks, with OSK Research upgrading its recommendations for WCT from "trading buy" to "buy" on July 20 after the firm won four infrastructure contracts worth more than $210m.

The government too would welcome the apparent upswing in the construction industry, being able to point to concrete results from its stimulus package at a time when some analysts are still predicting a slow recovery.

A recent report from the Malaysian Institute of Economic Research (MIER) predicted GDP to slow by -4.2% this year, downgrading earlier forecasts of -2.2%. The MEIR based its expectations on weak business and consumer sentiment.

There are signs, however, that positive sentiment is returning, with a study by independent market research agency InsightAsia Research in mid-July showing that Malaysia's consumer confidence index had risen to 94 in the second quarter, not far short of the neutral level of 100 and well up from 83 in the first three months of 2009.

Combined with this is data from Malaysian Resources Corporation (MRCB) showing that new-build construction levels in Malaysia are currently on the rise, in part assisted by lower materials costs. Since peaking at $1105 last year, steel prices have fallen by 50%.

"We can definitely look forward to better times, especially with cheaper materials prices now," MRCB's group managing director, Shahril Ridza Ridzuan, told the Malaysian Star on July 13.

Lower costs and growing confidence will both support the recovery in the construction sector, giving investors more incentive to commit to new projects.

Along with the larger projects, government funding is also being directed towards smaller developments, such as upgrading local roads and services, constructing new schools, health centres and state buildings, and improving communications infrastructure.

It is not just state funding that is priming the construction industry's pump. The sector was also bolstered by the news in mid-July that Merapoh Resources Corporation had found investors willing to put up the money for a $10bn crude oil refinery facility in the Yan district in the state of Kedah.

While much of the work has been contracted to South Korea's SK Engineering and Construction Company, Malaysian firms are expected to benefit from subcontracting projects and through supplying materials, with Merapoh saying it would give 30% of its project's contracts to local companies. The project is set to have an immediate impact, with work due to start shortly and with the refinery and supporting infrastructure scheduled to be completed by 2014 at the latest.

Funding apart, the construction industry should also benefit from the government's programme of economic reforms, which have included liberalising the services and opening the financial sectors to higher levels of foreign involvement, both through investment and employment of overseas personnel.

The government has also changed the regulations dealing with foreigners acquiring property, removing the requirement for state approval for transactions involving a dilution of bumiputra, the Malaysian term for ethnic Malays, or government interests for properties valued at $5.6m and above.

Additionally, sales of commercial property and industrial land worth more than $140,000 to overseas buyers will not require approval, though from January 1, 2010, the minimum threshold of residential units that can be sold to foreigners will be doubled from the current $70,000 to $140,000.

All these measures could act as a stimulus in the residential and commercial property markets, in turn driving demand in the construction industry. Unlike the more immediate effects of the government's spending programme, any surge in building spurred by the reform package could take longer to make itself felt.

Malaysia's construction industry is again on the move, with its shorter- and medium-term prospects far brighter than they were six months ago.

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